ArrowMark Financial Corp.

Welcome to the Stone Tassel Financial Corp Q3 2020 Investor Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. Now, I would like to turn the call over to Rachel Shatton, General Counsel of Stone Castle Financial. Please go ahead.

Good afternoon. Before we begin this conference call, I'd like to remind everyone that certain statements made during the call may be considered forward-looking statements based on current management expectations that involve substantial risks and uncertainties. Actual results may differ materially from the results stated in or implied by these forward-looking statements. This would depend on numerous factors such as changes in securities or financial markets or general economic conditions, the volume of sales and purchases of shares of common stock, the continuation of investment advisory, administrative, and service contracts, and other risks discussed from time to time in the company's filings with the SEC, including annual and semiannual reports of the company. Stone Castle Financial has based the forward-looking statements included in this presentation on information available to us as of September 30, 2020. The company undertakes no duty to update any forward-looking statement made herein. All forward-looking statements speak only as today, November 12, 2020. Now, I will turn the call over to Sanjay Bosley.

Thank you, Rachel. Good afternoon and welcome to Stone Castle Financial's third quarter investor call for 2020. Here with me today is Pat Farrell, our CFO, and Julie Morocco, Investor Relations. During today's presentation, I will briefly comment on the banking industry and credit markets before commenting on the company. Then I will provide Stone Castle Financial's quarterly results and portfolio review, and Pat will provide you with greater detail on our financial results before we open the call for questions. During the past few weeks, we saw several banks reporting better than expected earnings for the third quarter, and many banks are signaling that they are well positioned to withstand a prolonged economic recovery. Furthermore, banks are well capitalized and, for the most part, have adequate reserves in anticipation of an increase in corporate defaults. The government stimulus issued in Q2 helped many businesses weather the third quarter And we believe that any additional stimulus going into 2021 will have the potential impact of keeping corporate default rates lower than expected. Going into Q4 and first half of 2021, our outlook for the banking industry remains cautiously optimistic. As with this call and with some exceptions, Stone Castle's underlying banks have reported third quarter results. Banks in our portfolio reported median net income up 8.4% versus the second quarter. In addition, our portfolio banks reported average tier one capital ratios of 12.4%, flat from Q2. Finally, Stone Castle's underlying banks reported change in median reserves up five basis points to 1.27%, and loan book growth was up 7.8%. I want to take a moment to mention some interesting statistics on community banks regarding the PPP stimulus program. The Independent Community Bankers Association reported that community banks exponentially serve their local and rural communities by providing PPP loans to 98% of the economically distressed or low-income counties and to approximately 97% of the rural counties receiving such loans. Overall, community banks were the dominant PPP lenders, serving approximately 58% of all PPP participants and 48% of all U.S. small businesses. The community banks also supported underrepresented small businesses with PPP loans, including approximately 74% to minority-owned, 72% to women-owned, and 64% to veteran-owned businesses. These statistics show the important role of the community banks within their communities and the positive impact that community banks have on economic development, financial inclusion, and job creation in the U.S. Now, let me comment on the credit markets for banks. During the third quarter, we saw credit spreads tighten for banking-related strategies by approximately 50 to 100 basis points. This was due to the residual of the Fed actions in Q2, but also due to a guarded optimism throughout the third quarter and the competitive environment for attractive banking-related assets. In Q3, we saw the primary markets continue to be more active in both alternative capital securities and community banking. in alternative capital securities, the pipeline of primary issuance in the fourth quarter and into the first half of 2021 is expected to remain active with anticipated new issuance of 3.5 to 4 billion. We are also seeing the issuer base continue to expand. In addition, we continue to see attractive yields for alternative capital securities in the secondary markets although not as advantageous as Q2. Community banking originations in the primary market was robust in the third quarter. The number of community bank issuances in Q3 were up approximately 50 percent from the prior quarter. Bank capital raised was $3.1 billion in Q3, down slightly from $3.7 billion in Q2. banks are generally able to issue sub-debt in the 4 to 6 percent range. We believe the current rate environment is allowing banks to issue sub-debt at historically low rates. The banks are issuing sub-debt to increase their term on capital and therefore will remain in a stronger position if the U.S. faces a prolonged economic recovery into 2021. Now to Stone Council financial results for the quarter. We are pleased to report that net investment income for the third quarter was approximately $2.8 million, or 42 cents per share, an increase of one cent per share from the prior quarter. At the third quarter end, the value of the investor portfolio was $147 million versus $165.8 million at the end of the second quarter of 2020, a decrease of 11% primarily due to the sale of the Community Funding CLO, which we purchased in 2015. I will have more comments on this sale in a few minutes. The net asset value at the end of the third quarter was $20.89 per share, up 62 cents from the prior quarter. Now let me turn to the portfolio review. During the third quarter, The company invested a total of $23.7 million, including $18.7 million in two alternative capital transactions, and $5 million in one subordinated note for a community bank. The three new investments contributed a weighted average effective yield to maturity of 7.83%, as all the securities were purchased from your market at par. The yields of these new assets remain accretive to our earnings. Since the Stone Castle Aramark transition over the last three quarters of reporting, the company has made approximately $60 million of investments, or 2.8 times the total dollar amount of investments made during the entire year of 2019. During the third quarter of 2020, the company received proceeds of $45.9 million from the sale of two investments and received partial paydowns of $3.9 million from five investments. During the quarter, the company sold the position in community funding CLO for $42.5 million. While this has been an attractive investment for Stonecastle Financial's portfolio over the past five years, the asset was about to reset with a step-up in rate. resulting in a net contribution of lower earnings. In addition, we made the decision to sell the entire position as a preemptive move to reduce the potential credit risk of the underlying assets and to enhance the risk profile for the entire portfolio. Although we did not spend all the proceeds during Q3, we have been active making investments in Q4, which I'll address momentarily. The $3.9 million in paydowns included a partial paydown of two regulatory capital trades, NANSA and Syntota, both of which were purchased at discounts during the market dislocation of Q2. This was an anticipated outcome, and these assets were able to contribute risk-adjusted returns of 13.5% and 12.1% respectively. Subsequent to the end of the quarter, the company made investments of approximately $13.7 million with a weighted average coupon rate of 8.4%. One of the investments, an alternative capital security, has an expected yield to maturity of 9.85% and yield to call of 10.7%. In addition, we purchased community bank preferred stock with a coupon of 9%. With Q3 and Q4 investments made to date, making up approximately 75% of the sales and proceeds from Q3, we believe the total portfolio investments, which currently show a net decline, will be made up with continued portfolio activity throughout the balance of the year. We expect the origination pipeline to continue to be strong in Q4, and we will provide more details of the four-quarter transactions on our next call. For all our banking-related investments, the portfolio is managed for income generation and capital preservation. We also look at investment capacity to offer total return to the portfolio on a risk-adjusted basis. At quarter end, the estimated annualized effective yield generated by the invested portfolio, excluding cash and cash equivalents, was approximately 9.18 percent. The alternative capital securities, represented approximately 38% of the total investments, and community bank-related investments represented approximately 46% of the portfolio. A full schedule of investments can be found on our website. Before I turn the call over to Pat, I want to touch upon the relative value of Stone Castle Financial stock. At the quarter end, Stone Castle Financial stock traded at a 7% discount to NAV with a 7.8% dividend yield. This is in comparison to other vehicles as the financial sector Spider Fund, which had a dividend yield of approximately 2.24%, or the Invesco KBW Bank Index that traded at an approximate 3.12% dividend yield during the same period. We believe Stonecastle Financial is also an attractive value relative to the Bloomberg Barclays U.S. Aggregate Bond Index, which traded at an approximate 2.01 percent distribution yield at quarter end. I'd like to point out that as of September 30th, Stone Castle Financial traded 537 basis points wide to the average dividend yields of the income-oriented vehicle peer group just mentioned. Now I want to turn the call over to Pat to discuss the financial results and provide details on the underlying net asset value of the company.